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CFP Personal Flashcards > Income Tax > Flashcards

Income Tax Flashcards

(80 cards)

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1
Q

Internal Revenue Code

A

primary source of all tax law

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2
Q

Treasury regulations

A

another source of tax law

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3
Q

Revenue rulings and revenue procedures

A

administrative interpretation and may be cited at precedent

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4
Q

Congressional Committee reports

A

indicate intent of Congress and may not be cited as precedent

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5
Q

Private letter rulings

A

apply to a specific taxpayer in a particular situation

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6
Q

Judicial sources

A

court decisions interpret law and/or facts

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7
Q

RIA and CCH

A

Publishers of references books (cannot be cited as law)

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8
Q

Individuals with a tax return filing requirement

A

 net income more than standard deduction
 Self-employed individuals who have net earnings of $400 or more have to file

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9
Q

Penalty amount for frivolous tax return

A

$5,000

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10
Q

Penalty amount for tax negligence

A

20% penalty of the underpayment amount (not interest) attributed to negligence

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11
Q

Penalty amount for tax fraud

A

75% penalty of the underpayment amount (not interest) attributed to fraud

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12
Q

Penalty amount for failure to pay taxes

A

POINT PAY

0.5% per month the tax is unpaid up to 25% maximum

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13
Q

Penalty amount for failure to file taxes

A

5% of the tax due each month up to 25% maximum

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14
Q

Rules around qualifying widow status

A
  • Can file as MFJ in year spouse died
  • Can file qualifying widower two years after death as long as qualifying child exists and doesn’t remarry
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15
Q

Gross income inclusions

A

o Ordinary dividends
o Taxable interest
o Business income/losses
o Capital gains/losses
o Real estate
o Punitive damages (EXCEPT wrongful death)
o Wages, salaries, tips
o IRA distributions
o Pensions and annuities
o Alimony received if divorced before 2019
o Unemployment income
o Income in respect of a decedent (IRD)
o Social Security
o Health insurance premiums paid for self-employed, partners, or more than 2% owners of an S corp
 Fully deductible as an adjustment
 Includes medical, dental, and long term care (NOT disability)

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16
Q

Gross income exclusions

A

o Gifts
o Inheritances
o Child support
o Municipal bond interest
o Workers’ compensation
o Compensatory damages
o Scholarships for tuition and books
o Employer provided parking up to $325 per month
o Discounts on company products
o Occasional overtime meals, cabs, theatre, or sporting event tickets
o Discounts on services up to 20% of what customers pay

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17
Q

Adjustments for AGI

A
  • Alimony paid if divorce occurred before 2019
  • IRA contributions
  • Keogh or SEP contributions
  • Student loan interest
  • Self-employment health insurance
  • ½ of self-employment tax
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18
Q

Itemized deductions

A

o Unreimbursed medical, dental, and LTC expenses exceeding 7.5% of AGI
o State, local, property, and real estate taxes (LIMITED TO $10,000 PER YEAR)
o Home mortgage interest
o Charitable gifts
o Investment interest expense
o Casualty losses from a federally declared disaster area
o Home office deduction

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19
Q

Rules around deducting investment interest expenses

A

 Deductible up to the amount of net investment income (no investment income means no deduction)
 Investment income = interest, non-qualified dividends, royalties, and short term gains
* Qualified dividends only count if taxpayer elects to use ordinary income status instead of favorable rates

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20
Q

Rules around home office deduction

A

 There must be no other fixed location of the trade or business where the taxpayer conducts substantial administrative or management activities
 Need to be self employed
 Deduction cannot create a loss
 Area of home is used exclusively and on a regular basis
 Must be used by the taxpayer to conduct administrative or management activities of a trade or business

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21
Q

Rules around deducting entertainment expenses

A

Generally not allowed (meals with employee present are fine but no more tickets to sporting or cultural events)

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22
Q

Rules around deducting meal expenses (non entertainment)

A

Salaried employee - no deduction allowed (best strategy is to be reimbursed in full)
Self employed - 50% deduction allowed

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23
Q

Kiddie tax

A

Unearned income under the age of 24

First $1,350 tax free
Next $1,350 at child’s rate
Anything above at parent’s rate

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24
Q

What is included in self-employment income?

A

net Schedule C income, general partnership income (K-1), board of director fees, part time earnings (1099)

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25
FICA tax rates for an employee
6.2% on Social Security wage amount, 1.45% on total amount (not deductible)
26
FICA tax rates for an employer
6.2% on Social Security wage base amount, 1.45% on total amount (deductible on the company's tax return)
27
Credit for child and dependent care expenses
o Nonrefundable o Until age 13 o Max credit = 20% x $3,000 per dependent ($6,000 max, 2 children)
28
Child tax credit
o Partially refundable (up to $1,700 per child) o $2,000 per child under age 17 (no max) o For son, daughter, stepchild, or foster child
29
Adoption credit
Nonrefundable  Includes paid out of pocket expenses relating to the adoption (adoption fees, court costs, attorney fees, cost to adopt foreign child including travel)  Doesn’t include costs of surrogate parentings and costs for adopting spouse’s child  Amount of the credit is directly related to the amount spent on adoption related expenses (if you adopt special needs child, you can claim the full amount)  If child is foreign, credit is available only in the year the adoption is final
30
Foreign tax credit
Nonrefundable Choose between taking credit or deduction
31
Elderly and disabled credit
Nonrefundable Must be age 65 and permanently disabled
32
Earned income credit
Refundable For people with low paying jobs and earned income under certain amounts
33
Calculation of gain on each installment payment
= installment amount x gross profit percentage
34
Gross profit percentage
= profit/contract price
35
Related party tax trap related to installment sale method
If the property is sold to a related party who turns around and sells it within two years of the original purchase date, installment sale would collapse and capital gain would be realized in the first year to the original owner (sales price - basis)
36
Rules around NOLs
 Indefinite carryforward (can use losses from prior years to offset current year income)  No carrybacks allowed
37
Sole proprietorship
 Advantages * Availability of retirement plans * 100% of medical insurance premiums are deductible by owner * No legal formalities * Conduit of income and losses to owner  Disadvantages * Unlimited liability * Business dies with owner  Taxable income reported on Schedule C and can be offset by losses in the same year  Deduction for business interest is unlimited  Indefinite carryforward of losses
38
Partnership
 Advantages * Availability of retirement plans * 100% of medical insurance premiums are deductible by partners * Partnership agreement can be oral (written preferred) * Conduit of income or losses to owner (both general and limited partnerships)  Disadvantages * Unlimited personal liability for general partners * Partnerships dissolve upon death, bankruptcy, or incapacity of partner  Limited partnership * Must have at least one general partner * Liability limited to capital contributions to partnership * Passive investor  Each partner includes on his return distributable share of the partnership income per the Form K-1  File form 1065  Losses are deductible up to basis
39
Personal service corporation (PSC)
 Closely held C corps where income retained by the business is taxed at 21% flat tax rate  HALE (health, accounting, law, engineering)
40
C corp
* Separate taxable entity * Limited liability * Continuity of life * Sale of stock to unlimited number of investors * Dividend received deduction – 50% of dividends received may be excluded from income of recipient corporation if recipient corporation owns 20% or less of distributing corporation
41
Section 1244 qualified small business stock
 Only applies to first $1 million of stock initially issued by C corps or S corps  Can take $100,000 ordinary loss per year rather than a capital loss  Any loss in excess is a capital loss
42
S corp
* Need unanimous election by shareholders to be eligible * Files on Form 1120S * No preferred stock allowed * Common stock can be voting and nonvoting * 100 shareholders max * Must be a domestic corporation * Losses are deductible up the basis * Only individuals, trusts, and estates can be shareholders
43
Basis rules for an S corp
Basis = direct contribution + personal loans (BANK LOANS DON'T COUNT) * Increases in basis = share of gains, cash retained by the company (GAIN AND CASH RETAINED) * Decreases in basis = share of losses, cash distributed
44
Basis rules for a partnership
* Basis = cash + direct loans made by the partner to the partnership + bank loans (BANK LOANS ARE INCLUDED)
45
LLC
Limited liability like a corporation, losses up to basis like a partnership
46
QBI deduction
20% Pass through entities only (no C corps)
47
Section 197
Amortization of intangibles (goodwill)
48
Section 179 deduction
Aa business may expense up to $1.25 million of tangible personal property (Section 1245) purchased for use in a trade or business in the year of acquisition * Cannot create a loss with the deduction (up to taxable earned income only) * Deduction not allowed in current year can be carried forward to future years CLOSER TO THE GROUND THAN SECTION 197
49
Property that qualifies for Section 1031
 Properties must be like kind and used in a trade or business (real estate for real estate) * If one of the properties exchanged isn’t in use as a rental, the person making the exchange must use that property as a rental in order for the 1031 exchange to be valid
50
Boot and basis rules
* Boot received is recognized gain (includes mortgage assumed by purchaser) * Boot paid adds to basis * Basis carries over from the last property
51
Netting gains and losses rules
 Short term gains netted against short term losses and long term gains netted against long term losses  If any gains and losses remain, they are netted again (DON’T NET GAINS WITH GAINS NOR NET LOSSES WITH LOSSES)  If a loss remains, only $3,000 of net losses can be used to offset ordinary income in a single year
52
Depreciation recapture (1245 property)
* When business sells equipment for a gain, must recapture lesser of total cost recover deduction taken or gain realized as 1245 gain (ordinary income) * Recover any excess gain as 1231 gain (capital gain) o 1231 gain = realized gain – cost recovery deduction * If amount realized is less than adjusted basis, result is ordinary loss
53
Rules around active participation in real estate
* $25,000 per year deduction of net losses from real estate activity from active or portfolio income o Subject to phaseout between $100,000 and $150,000
54
AMT preference items
IRS PREFERS you pay taxes on these  Excess intangible drilling costs  Private activity municipal bond  Oil and gas percentage depletion (NOT cost depletion)  Depreciation (MACRS, NOT straight line)
55
AMT add back items
Itemized deductions that aren't allowable deductions  ISO bargain element (excess of the fair market value at the exercise date over the exercise price)  Property, state, city income and sales taxes
56
AMT payable calcuation
= AMT payable - regular tax due  Don’t want to fall into AMT (no AMT due if regular tax is greater than AMT amount)
57
Planning strategies to avoid AMT
 Accelerating receipt of taxable income in an AMT year (ex: exercise nonqualified stock options in an AMT year)  Deferring ISO exercises into a non-AMT year  Move deductions into a non-AMT year (ex: pay off mortgage which reduces his interest deduction)  Purchase public purpose municipal bonds
58
Loss rules around non-publicly traded partnerships
can offset income from other nonpublic traded partnerships Real estate limited partnerships (RELPs) are non-publicly traded
59
Loss rules around publicly traded partnerships
can only offset income from the same publicly traded partnership in subsequent years Master limited partnerships (MLPs) are publicly traded
60
Passive activities and active and material participation
Active and material participation aren't passive Active - less stringent, bonafide involvement in management decisions, must own at least 10% of the property Material - involved in operation on a regular, continuous, and substantial basis
61
Schedule A
Itemized deductions
62
Schedule B
Interest and dividend income
63
Schedule C
Self-employment income
64
Schedule D
Capital gains or losses
65
Schedule E
Real estate gains or losses
66
Schedule SE
Self employment tax
67
How many days per year can a person rent his primary residence and exclude the rental income?
14 days or less
68
How many days per year can use a rental property and not have it count as a residence?
Greater of 10% of days rented in a year or 14 days
69
Low income housing credit
up to $25,000 as long as held as a passive activity * No phaseout which means a larger credit is earned * Allowed annually over a 10 year credit period * Depreciation is straight line over 27.5 years
70
Oil and gas working interests
can be deducted from active or portfolio income no income limits or AGI limitations
71
Maximum income tax deductible amount to charity in one year
60% of AGI Anything in excess will be carried forward for five years or death if sooner
72
50% organizations
Public charities (churches, schools, hospitals, literary purposes, for prevention of cruelty to children or animals)
73
30% organizations
Private charities (private nonoperating foundations, fraternal orders, war veterans’ organizations)
74
Deduction limits for appreciated long term capital gain property to 50% organizations
30% of AGI when using FMV (30%, FMV, 3 LETTERS), excess is carried forward 50% of AGI when using basis (50%, BASIS, 5 LETTERS), no carryforward
75
Ordinary income property
Inventory, copyright, use unrelated property, work of art created by taxpayer, short term capital gains property, life insurance, collectibles
76
Deduction limits for ordinary income property
Deduction is limited to basis and 50% of AGI OR WHAT THE PROPERTY CAN SELL FOR BASIS, 5 LETTERS, 50%
77
Deduction for use related property
Based on FMV
78
Deduction for use unrelated property
Limited to lesser of FMV or basis
79
Adjusted basis in a charitable bargain sale
= sales proceeds/FMV x basis
80
Taxable gain in a charitable bargain sale
= sales price - adjusted basis

CFP Personal Flashcards (6 decks)

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